Don’t Blame Inflation for Big Law’s Record High Billing Rates

Welcome back to the Big Law Business column. I’m Roy Strom, and today we debunk the idea that law firm billing rate increases are correlated with inflation.

Big Law is poised to turn in a financial year that rivals the explosive growth of 2021, and the success is driven by a now-familiar strategy: raise billing rates at historical levels.

Billing rates rose 10% through three quarters at the 50 largest firms by revenue, according to Wells Fargo’s law firm banking unit. That’s the biggest driver behind a 14.6% revenue increase for those firms. Demand for lawyers’ time, the other factor influencing revenue growth, rose 4.4% at the largest firms.

“We’re at record high rates and it looks like that will continue in the near term,” said Owen Burman, managing director at Wells Fargo’s law firm banking unit. “Indications are rate increases requested for next year will be as high as they were in 2024.”

We have a saying around here: Never underestimate Big Law’s ability to raise rates.

You should never be surprised when billing rates rise. The presumption is that they will. Still, it’s worthwhile to ask why they are rising at any given moment.

That’s been an interesting question over the past couple of years, thanks to a new entrant in the equation: Inflation.

Start with 2022, a period when demand for Big Law’s time was declining. If the law of supply and demand applied to high-end law firms (it does not seem to, at least through the mechanism of rates), that would be a recipe for declines in billing rates.

And yet, Big Law was raising prices.

One explanation offered then was that law firms were responding to inflationary pressures gripping the broader economy. Inflation in the US, by one measure, hit 8% in 2022, a level not seen since the 1980s.

For law firms, a narrative that inflation was driving up bills may have provided a release valve from pressure against the increases. “The cost of everything is going up; lawyers are no different!”

But that was always hard to believe.

For one thing, rates started increasing well before inflation began to run hot. From 2018 to 2020, when inflation was at or below 2%, worked rate growth (a rate clients agree to pay) at the AmLaw 100 expanded from nearly 4% to more than 6%, according to data from Thomson Reuters. That figure rose only slightly, to just above 7%, during the two years when inflation rose most.

And it’s now even clearer that narrative was wrong.

Inflation has cooled rapidly since 2022, and it is now trending toward the US Federal Reserve’s long-term 2% target. That’s why benchmark interest rates are, if slowly, starting to decline.

If Big Law rates had any correlation to broader inflation, the rate increases would have slowed throughout the year. They’ve done the opposite. Standard rate growth through six months at all firms was 8.8%, and it ticked up to 9% through three quarters, Wells Fargo data shows.

Time to answer the question posed earlier: Why are rates rising so quickly now? Well, we start with the assumption they’ll almost always rise by edict at the start of a new year. Then we find the marginal difference. This year, it seems law firms are focusing on a high-priced sector.

The incremental growth this year has been driven by an increase in transactional work, which typically charges higher rates for clients who are less sensitive to price, Burman said, adding that transactional practices are generally less prone to discounts.

There is little indication clients are pushing back on rate increases, he said. Realization rates, or the portion of a bill that the law firm collects, have remained stable. And law firms are collecting on their bills faster than they had been recently, he said.

“Buyers are very particular about what they’re sending to Big Law firms, so they’re getting very sensitive work sent there,” Burman said. “In a normal environment, you’d see supply increase to absorb that, but it’s a pretty restricted business. So, it’s a big focus on high-rate, quality work. And it’s being aggregated into the top firms.”

In other words, Big Law firms have pricing power and they typically wield it.

Now, we don’t know what will happen with inflation next year.

But we do know at least two things. Never underestimate Big Law’s ability to raise rates. And inflation has little to do with it.

Worth Your Time

On Associate Bonuses: The market for year-end bonuses appears to be set, as Cravath Swaine & Moore said it will give associates up to $140,000 in extra cash, Meghan Tribe reports. The amount matches a pair of bonuses previously announced by Milbank, a first-mover in the associate salary wars.

On Paul Weiss: The acquisitive law firm brought on two prominent litigators from Weil Gotshal, Meghan Tribe reports. The firm added Elizabeth Stotland Weiswasser, who will be one of five co-chairs of the firm’s litigation department, and Anish Desai.

On Mass Torts: Delayed payouts, upcoming debt payments, and a dearth of new cases on the horizon are raising fears that law firms in the mass tort business are overleveraged, Emily Siegel reports.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.